The Short Read

On April 24, 2023, the US Securities and Exchange Commission (the SEC) designated Sunday, June 11, 2023, as the date by which it would either approve or disapprove the executive compensation recovery — or clawback — rules proposed by the New York Stock Exchange (the NYSE) and the Nasdaq Stock Market (the Nasdaq). If that date holds, and the SEC acts to approve the proposed rules, they will take effect on August 8, 2023 (the Anticipated Effective Date), and public companies will need to adopt a compliant compensation recovery policy by that date. Our previous client alert discusses 10D-1 in detail.

Because adoption of a clawback policy that satisfies either the NYSE or Nasdaq listing standards may involve changes in compensation policies, documents, and internal controls, among other things, listed companies should assess the status of their preparations and, if necessary, accelerate this work to ensure compliance before the Anticipated Effective Date.

Action Items for Listed Companies

If the exchanges’ proposed listing rules are approved and become effective as of the Anticipated Effective Date, listed companies must adopt a clawback policy that complies with Rule 10D-1 and the applicable stock exchange listing standards not later than the Anticipated Effective Date. Companies will need to work with internal teams and outside advisers to formulate a policy for review and approval by the board of directors and/or board committees. 

The following is a list of action items that public companies should consider as they prepare for the Anticipated Effective Date and the implementation of the final compensation recovery policy rules:

• Determine what actions the board of directors and/or compensation committee must take before the Anticipated Effective Date to adopt the new clawback policy and approve any related changes to existing incentive compensation arrangements necessary for compliance with such policy.
• If there is an existing clawback policy in place, evaluate whether to revise or replace the existing policy and consider whether it would be advantageous to adopt the Rule 10D-1 clawback policy as a separate policy.
• Consider whether incentive compensation provisions in existing compensation agreements, plans, and awards with current and certain former executive officers will require revision to ensure enforceability of the company’s clawback policy, if required by the listing standards.
• Evaluate current incentive compensation policies, programs, and practices, especially those that use financial performance measures (which include stock price and total shareholder return under the rules), to determine whether it would be advantageous to revise or restructure such policies prospectively.
• Review existing controls and procedures to ensure that the company can track incentive compensation earned and received by current and former executive officers and, if necessary, enforce recovery of incentive compensation.
• Revise disclosure controls and procedures, if necessary, to facilitate the disclosure requirements that will apply to annual reports on Form 10-K and Form 20-F, Form 8-K reports, and proxy and information statements.
• Foreign private issuers (FPIs) must identify, probably for the first time, which officers will be considered “executive officers” as defined in the final NYSE and Nasdaq rules and, therefore, subject to potential incentive compensation clawbacks. This definition is essentially the same as the definition of “officer” under Section 16 of the Securities Exchange Act, which does not apply to officers of FPIs, and is likely to include a different group of officers than those identified by an FPI as “senior management” in Item 1 of Part I of Form 20-F.
• FPIs and other listed companies that do not currently have independent compensation committees or directors who have been designated as “independent” under NYSE or Nasdaq listing standards may need to create appropriate governance structures to ensure compliance with the new listing standards and Rule 10D-1.
• FPIs may in some cases need to comply with shareholder approval requirements for incentive compensation arrangements by holding a shareholder meeting to approve the new clawback policy and related incentive compensation arrangements.

Background on the Clawback Requirements: Substance and Timing

The long process of implementing a requirement that public companies adopt a clawback policy dates back to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act mandated that the SEC direct the stock exchanges to require that their listed companies implement a compensation recovery policy focused on erroneously awarded incentive compensation paid to current and former executive officers. The SEC adopted Rule 10D-1 to implement the Act’s mandate, and it became effective on November 28, 2022. 

Broadly speaking, under Rule 10D-1, the exchanges must require that listed companies adopt and comply with policies that provide for the recovery of incentive-based compensation received by current and former executive officers based on any misstated financial reporting measure if the company is required to prepare an accounting restatement. The rule also requires listed companies to disclose these clawback policies publicly and to file them as an exhibit to the company’s annual report. Rule 10D-1 and the NYSE and Nasdaq listing standards will apply to nearly all companies with listed securities, including smaller reporting companies, emerging growth companies, and FPIs. 

Under Rule 10D-1, the new stock exchange listing standards were not required to become effective until November 28, 2023, which would have given listed companies until January 27, 2024, to adopt the new clawback policies. However, the exchanges acted more quickly than many expected. 

In February 2023, each of the NYSE and Nasdaq filed proposed new listing standards implementing the compensation recovery policy requirements with the SEC. The proposed standards were subject to public comment and review by the SEC over a 45-day period and required the SEC to act on the proposed listing standards not later than April 27, 2023. The SEC recently announced that it was extending that deadline to June 11, 2023. Because June 11, 2023 is a Sunday, the latest date on which the SEC would either approve or disapprove the proposed rule changes is June 9, 2023. Thus. the new rules will take effect 60 days after SEC approval, on August 8, 2023. Unless the SEC further extends its deadline, listed companies must adopt a clawback policy that complies with the stock exchange listing standards and Rule 10D-1 not later than the Anticipated Effective Date. 

The SEC could further extend the current June 11, 2023 deadline for approval of the stock exchange listing standards or approve the listing standards subject to deferred effectiveness rather than the immediate effectiveness currently provided by the NYSE and Nasdaq proposals, but there is no assurance that the SEC will do so, and we believe that such an extension or deferred effectiveness is unlikely.

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